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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED SEPTEMBER 30, 2002
COMMISSION FILE NUMBER 1-9371
ALLEGHANY CORPORATION
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EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER
DELAWARE
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STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION
51-0283071
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INTERNAL REVENUE SERVICE EMPLOYER IDENTIFICATION NUMBER
375 PARK AVENUE, NEW YORK NY 10152
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ADDRESS OF PRINCIPAL EXECUTIVE OFFICE, INCLUDING ZIP CODE
212-752-1356
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
NOT APPLICABLE
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FORMER NAME, FORMER ADDRESS, AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE
YES [X] NO [ ]
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INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASS OF
COMMON STOCK, AS OF THE CLOSE OF THE PERIOD COVERED BY THIS REPORT:
7,234,502 SHARES
AS OF SEPTEMBER 30, 2002
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ITEM 1. FINANCIAL STATEMENTS
ALLEGHANY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001
(dollars in thousands, except share and per share amounts)
(unaudited)
2002 2001
----------- -----------
REVENUES
Net fastener sales $ 28,150 $ 29,721
Interest, dividend and other income 12,947 15,904
Net insurance premiums earned 32,700 0
Net mineral and filtration sales 55,686 55,725
Net (loss) on sale of subsidiary 0 (253,408)
Net gain on investment transactions 4,617 11,359
----------- -----------
Total revenues 134,100 (140,699)
----------- -----------
COSTS AND EXPENSES
Commissions and brokerage expenses 6,867 0
Salaries, administrative and other operating expenses 23,937 17,418
Loss and loss adjustment expenses 30,192 0
Cost of goods sold-fasteners 21,084 23,881
Cost of mineral and filtration sales 38,136 39,500
Interest expense 1,845 3,482
Corporate administration 6,940 7,536
----------- -----------
Total costs and expenses 129,001 91,817
----------- -----------
Earnings from continuing operations, before income taxes 5,099 (232,516)
Income taxes (16,621) (195,708)
----------- -----------
Earnings from continuing operations 21,720 (36,808)
DISCONTINUED OPERATIONS
(Loss) from discontinued operations, net of tax 0 (184,010)
----------- -----------
Net earnings $ 21,720 ($ 220,818)
=========== ===========
BASIC EARNINGS (LOSS) PER SHARE OF COMMON STOCK **
Continuing operations $ 2.99 ($ 4.99)
Discontinued operations 0.00 (24.94)
----------- -----------
Basic net earnings per share $ 2.99 ($ 29.93)
=========== ===========
DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK **
Continuing operations $ 2.98 ($ 4.99)
Discontinued operations 0.00 (24.94)
----------- -----------
Diluted net earnings per share $ 2.98 ($ 29.93)
=========== ===========
Dividends per share of common stock * *
=========== ===========
Average number of outstanding shares of common stock ** 7,264,620 7,378,109
=========== ===========
- ----------
* In March 2002, Alleghany declared a dividend consisting of one share of
Alleghany common stock for every fifty shares outstanding.
** Adjusted to reflect the common stock dividend declared in March 2002.
ALLEGHANY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001
(dollars in thousands, except share and per share amounts)
(unaudited)
2002 2001
----------- -----------
REVENUES
Net fastener sales $ 85,035 $ 94,149
Interest, dividend and other income 32,924 45,735
Net insurance premiums earned 92,370 0
Net mineral and filtration sales 162,170 163,906
Net gain on sale of subsidiaries 0 522,402
Net gain on investment transactions 43,564 12,672
----------- -----------
Total revenues 416,063 838,864
----------- -----------
COSTS AND EXPENSES
Commissions and brokerage expenses 18,423 0
Salaries, administrative and other operating expenses 68,452 58,859
Loss and loss adjustment expenses 73,419 0
Cost of good sold-fasteners 64,171 77,014
Cost of mineral and filtration sales 112,710 118,329
Interest expense 5,141 11,427
Corporate administration 15,954 40,243
----------- -----------
Total costs and expenses 358,270 305,872
----------- -----------
Earnings from continuing operations, before income taxes 57,793 532,992
Income tax expense 1,369 101,056
----------- -----------
Earnings from continuing operations 56,424 431,936
DISCONTINUED OPERATIONS
(Loss) from discontinued operations, net of tax 0 (206,663)
----------- -----------
Net earnings $ 56,424 $ 225,273
=========== ===========
BASIC EARNINGS (LOSS) PER SHARE OF COMMON STOCK**
Continuing operations $ 7.72 $ 58.55
Discontinued operations 0.00 (28.01)
----------- -----------
Basic net earnings per share $ 7.72 $ 30.54
=========== ===========
DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK**
Continuing operations $ 7.60 $ 57.87
Discontinued operations 0.00 (27.56)
----------- -----------
Diluted net earnings per share $ 7.60 $ 30.31
=========== ===========
Dividends per share of common stock * *
=========== ===========
Average number of outstanding shares of common stock** 7,313,423 7,377,249
=========== ===========
- ----------
* In March 2002, Alleghany declared a dividend consisting of one share of
Alleghany common stock for every fifty shares outstanding.
** Adjusted to reflect the common stock dividend declared in March 2002.
ALLEGHANY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
(dollars in thousands, except share and per share amounts)
(Unaudited)
September 30, December 31,
2002 2001
------------- ------------
ASSETS
Available for sale securities: 9/30/2002 12/31/2001
--------- ----------
Fixed maturities (cost $457,984 $0) $ 465,741 $ 0
Equity securities (cost $274,752 $226,226) 469,483 550,826
Short-term investments 306,847 796,511
---------- ----------
1,242,071 1,347,337
Cash 32,788 15,717
Notes receivable 92,410 91,536
Accounts receivables 95,842 57,161
Reinsurance receivable 139,951 0
Property and equipment - at cost, less accumulated depreciation and amortization 170,160 169,622
Inventory 71,878 71,169
Goodwill and other intangibles, net of amortization 112,071 49,708
Other assets 105,515 72,755
---------- ----------
$2,062,686 $1,875,005
========== ==========
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current taxes payable $ 12,110 $ 90,209
Losses and loss adjustment expenses 244,098 0
Other liabilities 127,502 103,595
Unearned premiums 66,458 0
Subsidiaries' debt 170,461 181,856
Net deferred tax liability 91,193 108,763
---------- ----------
Total liabilities 711,822 484,423
Common stockholders' equity 1,350,864 1,390,582
---------- ----------
$2,062,686 $1,875,005
========== ==========
Shares of common stock outstanding 7,234,502 7,350,006*
========== ==========
Common stockholders' equity per share $ 186.73 $ 189.20*
========== ==========
- ----------
* Adjusted to reflect the common stock dividend declared in March 2002.
ALLEGHANY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001
(dollars in thousands)
(unaudited)
2002 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings from continuing operations $ 56,424 $ 431,936
Adjustments to reconcile net earnings to cash (used in) provided by operations:
Depreciation and amortization 14,170 12,560
Net gain on investment transactions (43,564) (233,975)
Tax benefit on stock options exercised 1,176 816
Other charges, net 18,256 (8,128)
(Increase) decrease in other receivables (37,046) 1,076
Decrease in other assets 19,649 24,680
Decrease in other liabilities and income taxes payable (67,708) (5,618)
Increase in unearned premium reserve 8,484 0
Decrease in losses and loss adjustment expenses (22,588) 0
Decrease in reinsurance receivable 42,255 0
--------- ---------
Net adjustments (66,916) (208,589)
--------- ---------
Cash (used in) provided by operations (10,492) 223,347
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investments (729,472) (77,193)
Sales of investments 503,039 90,796
Purchases of property and equipment (8,270) (8,660)
Net change in short-term investments 512,166 (740,600)
Other, net 8,353 1,438
Acquisition of insurance companies, net of cash acquired (221,056) 0
Proceeds from sale of subsidiaries, net of cash disposed 0 531,477
--------- ---------
Net cash provided by (used in) investing activities 64,760 (202,742)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on debt (2,994) (30,727)
Proceeds of debt 2,456 13,957
Net change in revolving credit loans (10,857) (5,312)
Treasury stock acquisitions (28,640) (11,234)
Other, net 2,838 10,401
--------- ---------
Net cash (used in) financing activities (37,197) (22,915)
--------- ---------
Net increase (decrease) in cash 17,071 (2,310)
Cash at beginning of period 15,717 10,247
--------- ---------
Cash at end of period $ 32,788 $ 7,937
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 3,311 $ 11,831
Income taxes $ 51,991 $ 5,737
Notes to the Consolidated Financial Statements
This report should be read in conjunction with the Annual Report on Form
10-K for the year ended December 31, 2001 (the "2001 Form 10-K"), the Quarterly
Report on Form 10-Q for the quarter ended March 31, 2002 (the "2002 First
Quarter Form 10-Q") and the Quarterly Report on Form 10-Q for the quarter ended
June 30, 2002 (the "2002 Second Quarter Form 10-Q") of Alleghany Corporation
(the "Company").
The information included in this report is unaudited but reflects all
adjustments which, in the opinion of management, are necessary to a fair
statement of the results of the interim periods covered thereby. All adjustments
are of a normal and recurring nature except as described herein.
On January 4, 2002, the Company completed the acquisition of Capitol
Transamerica Corporation ("CATA") for a total purchase price of approximately
$182 million, of which $62.8 million was allocated to goodwill and intangibles.
Contemporaneous with the acquisition of CATA, the Company purchased a
Nebraska-domiciled insurance company for a total purchase price of approximately
$40 million, of which $8.3 million was allocated to goodwill and intangibles.
The Company applies the following significant accounting policies to its
insurance operations:
a. DEFERRED ACQUISITION COSTS
Acquisition costs that vary with, and are directly related to, the
production of premiums (principally commissions, premium taxes, compensation and
certain underwriting expenses) are deferred. Deferred acquisition costs are
amortized to expense as the related premiums are earned. Deferred acquisition
costs are periodically reviewed to determine their recoverability from future
income, including investment income, and if any such costs are determined not
recoverable they are charged to expense.
b. PREMIUMS
Premiums are recognized as revenue on a pro-rata basis over the term of a
contract. Unearned premiums represent the portion of premiums written which are
applicable to the unexpired terms of insurance policies in force.
c. INVESTMENTS
The investment portfolio consists of fixed maturity instruments, equity
securities and short-term investments. The portfolio is classified as available
for sale and carried at its fair market value. Unrealized gains or losses, net
of the related tax effect, are excluded from earnings and reported in
comprehensive income as a separate component of
6
stockholders' equity until realized. A decline in the fair value of available
for sale investments that is deemed other than temporary is charged to earnings.
The cost basis of fixed maturity instruments is adjusted for the amortization of
premiums and the accretion of discounts to maturity. Realized gains and losses
are determined on the specific identification method.
d. LOSS RESERVES
The reserves for losses and loss adjustment expenses represent
management's best estimate of the ultimate cost of all reported and unreported
losses incurred through the balance sheet date and include: (i) the accumulation
of individual estimates for claims reported on direct business prior to the
close of the accounting period; (ii) estimates received from other insurers with
respect to reinsurance assumed; (iii) estimates for incurred but not reported
claims based on past experience modified for current trends and (iv) estimates
of expenses for investigating and settling claims based on past experience. The
liabilities recorded are based on estimates resulting from the continuing review
process, and differences between estimates and ultimate payments are reflected
as an expense in the statement of earnings in the period in which the estimates
are revised.
e. REINSURANCE
The Company follows the customary practice of reinsuring with other
companies the loss exposures on business it has written. This practice allows
the Company to diversify its business and write larger policies, while limiting
the extent of its primary maximum net loss. Reinsurance ceded contracts do not
relieve the Company from its obligations to policyholders. The Company remains
liable to its policyholders for the portion reinsured to the extent that any
reinsurer does not meet the obligations assumed under the reinsurance
agreements. To minimize its exposure to losses from reinsurer insolvencies, the
Company continually evaluates the financial condition of its reinsurers.
Comprehensive (Loss)/Income
The Company's total comprehensive (loss)/income for the three and
nine months ended September 30, 2002 and 2001 was $ (48.1) million and $(275.1)
million, and $(16.4) million and $205.2 million, respectively. Comprehensive
income includes the Company's net earnings adjusted for changes in unrealized
depreciation of investments, which was $(69.4) million and $(55.8) million, and
$(74.8) million and $(18.5) million, and cumulative translation adjustments,
which were $(0.5) million and $1.5 million, and $1.9 million and $(1.6) million,
for the three and nine months ended September 30, 2002 and 2001, respectively.
7
Segment Information
Information concerning the Company's continuing operations by industry
segment is summarized below (in thousands):
For the three months ended For the nine months ended
-------------------------------- --------------------------------
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
REVENUES
Property and casualty
insurance $ 32,534 $(237,711) $ 96,429 $(230,348)
Mining and filtration 56,299 56,062 162,300 163,947
Industrial fasteners 28,150 29,721 85,035 94,149
Corporate activities 17,117 11,229 72,299 811,116
--------- --------- --------- ---------
Total $ 134,100 $(140,699) $ 416,063 $ 838,864
========= ========= ========= =========
EARNINGS (LOSS) FROM
CONTINUING OPERATIONS
Property and casualty
insurance $ (10,442) $(237,711) $ (11,369) $(230,348)
Mining and filtration 7,336 5,369 18,001 13,468
Industrial fasteners 389 (1,481) 1,469 (14,150)
Corporate activities 7,816 1,307 49,692 764,022
--------- --------- --------- ---------
Total 5,099 (232,516) 57,793 532,992
Income taxes (16,621) (195,708) 1,369 101,056
--------- --------- --------- ---------
Earnings from continuing
operations $ 21,720 $ (36,808) $ 56,424 $ 431,936
========= ========= ========= =========
September 30, December 31,
2002 2001
-------------- -------------
IDENTIFIABLE ASSETS
Property and casualty
insurance $ 631,586 $ 142,956
Mining and filtration 323,356 310,129
Industrial fasteners 75,365 78,053
Corporate activities 1,032,379 1,343,867
---------- ----------
Total $2,062,686 $1,875,005
========== ==========
8
Contingencies
The Company's subsidiaries are parties to pending claims and litigation in
the ordinary course of their businesses. Each such operating unit makes
provisions on its books in accordance with generally accepted accounting
principles for estimated losses to be incurred as a result of such claims and
litigation, including related legal costs. In the opinion of management, such
provisions are adequate as of September 30, 2002.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
The Company reported net earnings from continuing operations in the third
quarter of 2002 of $21.7 million on revenues of $134.1 million, compared with
net losses of $36.8 million on revenues of $140.7 million in the third quarter
of 2001. Net earnings include a net credit of $18.1 million in the provision for
income taxes reflecting an adjustment of the Company's estimated state and
federal tax liabilities. The Company periodically reviews and reconciles the
provisions for taxes on its books with the tax returns it files with various
taxing authorities. Adjustments are recognized in the income statement in the
period in which they are identified, along with a corresponding balance sheet
adjustment to current taxes payable. The 2002 third quarter results also include
net gains on investment transactions after taxes of $3.0 million compared with
$7.4 million in the 2001 period.
Net earnings including discontinued operations were $21.7 million in the
third quarter of 2002, compared with net losses of $220.8 million in the 2001
third quarter. Discontinued operations for the 2001 third quarter consist of the
operations of Alleghany Underwriting prior to its disposition in November 2001.
In the first nine months of 2002, the Company's net earnings from
continuing operations were $56.4 million on revenues of $416.1 million, compared
with $431.9 million on revenues of $838.9 million in the first nine months of
2001. Net earnings including discontinued operations were $56.4 million in the
first nine months of 2002, compared with $225.3 million in the 2001 period. Such
discontinued operations for the first nine months of 2001 consist of the
operations of Alleghany Asset Management prior to its disposition in February
2001 and the operations of Alleghany Underwriting prior to its disposition in
November 2001.
The 2002 nine-month results also include net gains on investment
transactions after taxes of $28.3 million, or approximately $3.88 per share,
compared with net gains on investment transactions after taxes of $8.2 million,
or approximately $1.12 per share in the 2001 period.
9
The 2001 nine-month results include an after-tax gain from the disposition
of Alleghany Asset Management of approximately $474.8 million, excluding certain
expenses relating to the closing of the transaction and an after-tax loss of
$50.5 million on the disposition of Alleghany Underwriting.
Effective January 1, 2002, the Company adopted Financial Accounting
Standards Board Statement 142, "Goodwill and Other Intangible Assets." In
general, SFAS 142 provides that goodwill and other intangible assets with
indefinite lives are no longer amortized, but are regularly tested for
impairment. At September 30, 2002, the Company had on its books $94.5 million of
goodwill and other intangible assets that may no longer be amortized pursuant to
provisions of SFAS 142.
World Minerals Inc. ("World Minerals") recorded pre-tax earnings of $7.3
million on revenues of $56.3 million in the 2002 third quarter, compared with
pre-tax earnings of $5.4 million on revenues of $56.1 million in the 2001 third
quarter, and pre-tax earnings of $18.0 million on revenues of $162.3 million in
the first nine months of 2002, compared with pre-tax earnings of $13.5 million
on revenues of $163.9 million in the first nine months of 2001. The 2002 nine
month results reflect the results of businesses acquired in April 2001 and
January 2002, net reductions of approximately $3.2 million in energy costs,
primarily natural gas, at U.S. and Latin American plants, $1.5 million in
interest expense and $1.2 million in amortization expense (primarily due to
requirements of SFAS 142) and cost controls. Such factors more than offset a
decline in net sales due to continued sluggish demand and competitive pressures
in the U.S. and in the European and Asian export markets for World Minerals'
U.S.-produced products. The 2001 revenues include energy surcharges on certain
of World Minerals' sales due to higher energy costs in the first nine months of
2001.
World Minerals is currently in the midst of a periodic strategic review of
its business processes, overhead costs, sales strategies and plant operations.
As part of such review, which commenced in the 2002 third quarter and will
continue through the fourth quarter of 2002, World Minerals will consider, among
other things, the possibility of reallocating certain production among its
various plants.
World Minerals exports a significant amount of products produced at its
Lompoc, California and Quincy, Washington plants to European and Asian markets
from West Coast ports served by union-represented dockworkers. In recent months,
the union and operators at these ports have been involved in an ongoing labor
dispute which included alleged work slowdowns and a management lock-out lasting
approximately ten days. In response to a request from President Bush, a federal
court in early October issued a preliminary injunction in accordance with the
Taft-Hartley Act that ended the management lock-out, required West Coast port
terminals to re-open and dockworkers to return to work and mandated an 80-day
"cooling off" period ending December 27, 2002.
10
The lock-out and alleged work slowdowns did not have a material adverse
effect on World Mineral's 2002 third quarter results and World Minerals does not
expect a significant impact on its 2002 fourth quarter results due to the
cooling off period currently in effect. However, the resumption of any lock-out
or work slowdown or stoppage upon the expiration of the cooling off period may,
depending on the duration of any such work disruptions, negatively impact World
Minerals' results in 2003.
Alleghany Insurance Holdings ("AIHL"), a holding company for CATA and
other insurance operations of the Company, recorded a pre-tax loss of $10.4
million on revenues of $32.5 million in the third quarter of 2002, and a pre-tax
loss of $11.4 million on revenues of $96.4 million in the first nine months of
2002. AIHL recorded a pre-tax loss of $237.7 million from continuing operations
in the third quarter of 2001, and pre-tax losses of $230.3 million from
continuing operations in the nine months of 2001, primarily reflecting the
disposition of Alleghany Underwriting in November 2001. The 2002 third quarter
losses primarily reflect $9.1 million of strengthening of CATA's loss reserves
for 2001 and prior years following an independent actuarial review, and $3.8
million realized investment loss recognized as part of CATA's efforts to
restructure its investment portfolio.
Following the Company's acquisition of CATA in January, under the
Company's direction, CATA commenced a review of its insurance products,
underwriting guidelines and controls, investment policies and reserving
methodology. With respect to its reserving methodology, CATA immediately
implemented the practice of establishing loss and loss adjustment expense
reserves ("case reserves") for newly reported claims on the basis of its
estimate of such costs through the expected resolution of the claim. CATA also
commenced a review of each of the claim files that was open as of December 31,
2001 to increase, where appropriate, the case reserves for such claim to the
claim's estimated ultimate cost of resolution. Completion of the review during
the 2002 third quarter resulted in the reserve strengthening of $9.1 million as
mentioned above.
As part of CATA's review of its insurance products and underwriting
guidelines, CATA has exited or re-underwritten certain product and casualty
product lines and continues to consider whether to exit or re-underwrite
additional property and casualty product lines. CATA expects that, as a result,
there will be a decline in gross premiums written in the property and casualty
product lines in the fourth quarter of 2002, but such decline is expected to be
offset in part by increases in gross premium written in the fidelity and surety
lines.
In connection with the acquisition by the Company of AIHL's
Nebraska-domiciled insurance company subsidiary, the seller, an A+ insurer,
contractually retained through a reinsurance agreement all of the liabilities in
existence at the time of such acquisition. At September 30, 2002, AIHL's loss
reserves reflected $136.5 million of such liabilities, compared with $151.0
million at June 30, 2002, and AIHL's reinsurance
11
receivables included a corresponding obligation of the seller. Such loss
reserves and reinsurance receivable amounts are expected to continue to decline
over time as losses are paid.
Heads & Threads International LLC ("Heads & Threads") recorded pre-tax
earnings of $0.4 million on revenues of $28.2 million in the 2002 third quarter,
compared with a pre-tax loss of $1.5 million on revenues of $29.7 million in the
2001 third quarter, and pre-tax earnings of $1.5 million on revenues of $85.0
million in the first nine months of 2002, compared with a pre-tax loss of $14.2
million on revenues of $94.1 million in the first nine months of 2001. The 2002
nine month results reflect net reductions of $3.9 million in operating expenses
(primarily due to lower salary expenses as a result of its restructuring
efforts), $2.4 million in interest expense and $0.4 million in amortization
expense (pursuant to requirements of SFAS 142) and higher profit margins, which
offset a decline in net sales due to reduced demand in the U.S. economy, as well
as reduced sales of certain product lines as a result of the application of
minimum profit margin pricing requirements for such products. The 2001 nine
months results include $2.5 million of pre-tax charges for write-offs relating
to Heads & Threads' computer system and the closure of certain branches and
sales offices, expenses relating to changes in its senior management and the
strengthening of its inventory reserves.
Heads and Threads receives a significant amount of the products it
distributes to its customers through West Coast ports subject to the work
disruptions and other events described above. In response to the possibility of
work disruptions, Heads and Threads began accelerating inventory purchases
during the 2002 second quarter and began making plans to use available East
Coast ports as necessary. To date, the impact of the work disruptions on the
results of Heads and Threads has not been material. Any resumption of work
disruptions upon the expiration of the cooling off period may have some impact,
among other things, on Heads and Threads' inventory levels during 2003, but the
ultimate impact on Heads & Threads will depend on the duration of any further
work disruptions.
As of September 30, 2002, the Company beneficially owned approximately
16.0 million shares, or 4.2 percent, of the outstanding common stock of
Burlington Northern Santa Fe Corporation, which had an aggregate market value on
that date of approximately $382.7 million, or $23.92 per share, compared with a
market value on June 30, 2002 of $480.0 million, or $30.00 per share. The
aggregate cost of such shares is approximately $181.8 million, or $11.36 per
share.
The Company has previously announced that it may purchase shares of its
common stock in open market transactions from time to time. In the third quarter
of 2002, the Company purchased an aggregate of 55,800 shares of its common stock
for approximately $10.3 million, at an average cost of about $184.25 per share.
As of
12
September 30, 2002, the Company had 7,234,502 shares of common stock outstanding
(which includes the stock dividend declared in March 2002).
The Company's common stockholders' equity per share at September 30, 2002
was $186.73 per share, a 1.3 percent decrease from common stockholders' equity
per share of $189.20 as of December 31, 2001 (both as adjusted for the stock
dividend declared in March 2002).
The Company's results in the first nine months of 2002 are not indicative
of operating results in future periods. The Company and its subsidiaries have
adequate internally generated funds and unused credit facilities to provide for
the currently foreseeable needs of its and their businesses.
The Company believes that the accounting policies it applies to the loss
and loss adjustment expense reserves of its insurance operations are critical to
an investor's understanding of the Company's consolidated financial results and
condition. In applying such policies, management makes subjective and complex
judgments that frequently require estimates about matters that are inherently
uncertain.
The Company establishes reserves for losses and loss adjustment expenses
for unpaid claims and claims expenses arising out of its insurance operations.
Pricing of such operations' insurance products takes into account the expected
frequency and severity of losses, the costs of providing coverage, competitive
factors, characteristics of the property covered and the insured and profit
considerations. Liabilities for property and casualty insurance are dependent on
estimates of amounts payable for claims reported but not settled and actuarial
estimates of claims incurred but not reported. These estimates are influenced by
historical experience and actuarial assumptions of current developments,
anticipated trends and risk management strategies. The Company continually
evaluates the potential for changes in loss estimates, both positive and
negative, and uses the results of these evaluations both to adjust recorded
provisions and to adjust underwriting criteria. Additionally, the Company has
engaged an outside actuary to evaluate on a quarterly basis the adequacy of
CATA's loss reserves. Because setting reserves is inherently uncertain, the
Company cannot assure that its insurance operations' current reserves will prove
adequate in light of subsequent events. Should such reserves need to be adjusted
in any future period, such adjustments will be reflected as an expense in the
statement of earnings in the period they are adjusted.
Information regarding the Company's other accounting policies is included
in the Company's 2001 Form 10-K and the Notes to the Consolidated Financial
Statements included in this report on Form 10-Q, the Company's 2002 First
Quarter Form 10-Q and 2002 Second Quarter Form 10-Q, respectively.
13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risk is the risk of loss from adverse changes in market prices and
rates, such as interest rates, foreign currency exchange rates and commodity
prices. The primary market risk related to the Company's non-trading financial
instruments is the risk of loss associated with adverse changes in interest
rates. In connection with its acquisition of CATA on January 4, 2002 and the
Company's purchase of securities with fixed maturities of one to five years
during the 2002 second and third quarters, the Company acquired fixed maturity
securities that expose it to risk related to adverse changes in interest rates
as set forth in the table below.
For fixed maturity securities, the change in fair value is determined by
calculating a hypothetical September 30, 2002 ending price based on yields
adjusted to reflect a +/-300 basis point range of change in interest rates,
comparing such hypothetical ending price to actual ending price and multiplying
the difference by the par outstanding.
SENSITIVITY ANALYSIS
At September 30, 2002
(dollars in millions)
Interest Rate Shifts -300 -200 -100 0 100 200 300
FIXED MATURITY SECURITIES ------ ------ ------ ------ ------ ------ ------
Estimated Portfolio Value $499.1 $489.4 $480.0 $465.7 $460.0 $448.1 $436.5
Projected Change in Portfolio Value $ 33.4 $ 23.7 $ 14.3 $ 0 $ (5.7) $(17.6) $(29.2)
The Company's 2001 Form 10-K provides a more detailed discussion of the
market risks affecting its operations. Based on the Company's estimates as of
September 30, 2002, no material change has occurred in its long-term debt
obligations, as compared with amounts disclosed in its 2001 Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision, and with the
participation, of the Company's management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures (as defined in
Rule 13a-14(c) under the Securities Exchange Act of 1934, as amended) as of a
date (the "Evaluation Date") within 90 days prior to the filing date of this
report. Based upon that evaluation, the Chief Executive
14
Officer and Chief Financial Officer concluded that, as of the Evaluation Date,
the Company's disclosure controls and procedures were effective in timely
alerting them to the material information relating to the Company required to be
included in its periodic SEC filings. There have been no significant changes in
the Company's internal controls or in other factors that could significantly
affect internal controls subsequent to the Evaluation Date.
Forward-Looking Statements
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Quantitative and Qualitative Disclosures About
Market Risk" contain disclosures which are forward-looking statements.
Forward-looking statements include all statements that do not relate solely to
historical or current facts, and can be identified by the use of words such as
"may," "will," "expect," "project," "estimate," "anticipate," "plan" or
"continue." These forward-looking statements are based upon the Company's
current plans or expectations and are subject to a number of uncertainties and
risks that could significantly affect current plans, anticipated actions and the
Company's future financial condition and results. The uncertainties and risks
include, but are not limited to, those relating to conducting operations in a
competitive environment, conducting operations in foreign countries, effects of
acquisition and disposition activities, general economic and political
conditions, including the effects of a prolonged U.S. or global economic
downturn or recession, changes in costs, including changes in labor costs,
extended labor disruptions, energy costs and raw material prices, variations in
political, economic or other factors such as currency exchange rates, inflation
rates, recessionary or expansive trends, tax changes, legal and regulatory
changes, significant weather-related or other natural or human-made disasters,
civil unrest or other external factors over which the Company has no control,
and changes in the Company's plans, strategies, objectives, expectations or
intentions, which may happen at any time at the Company's discretion. As a
consequence, current plans, anticipated actions and future financial condition
and results may differ from those expressed in any forward-looking statements
made by or on behalf of the Company.
15
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
(c) Recent Sales of Unregistered Securities.
On August 16, 2002, the Company issued an aggregate of 77 shares of the
Company's common stock to seven non-employee directors of the Company pursuant
to the Alleghany Corporation Directors' Equity Compensation Plan representing
one-half of the value of an increase in each director's retainer for the
following twelve months' service as a director, exclusive of any per meeting
fees, committee fees or expense reimbursements. The sale of common stock was
exempt from registration under the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to Section 4(2) thereof, as a transaction not
involving a public offering.
On July 17, 2002, the Company issued 488 shares of common stock to Paul F.
Woodberry, director of Alleghany Properties, Inc., a wholly owned subsidiary of
the Company, pursuant to a long-term incentive arrangement with the Company in
respect of sales of real estate assets by Alleghany Properties, Inc. The sale of
common stock was exempt from registration under the Securities Act pursuant to
Section 4(2) thereof, as a transaction not involving a public offering.
The above does not include unregistered issuances of the Company's common
stock that did not involve a sale, consisting of issuances of common stock and
other securities pursuant to employee incentive plans.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit Number Description
-------------- -----------
3.1 By-laws of Alleghany Corporation, as amended September
17, 2002
10.1 Employment Agreement, dated October 7, 2002, between
Alleghany Corporation and Weston M. Hicks
10.2 Restricted Stock Award Agreement, dated October 7, 2002,
between Alleghany Corporation and Weston M. Hicks
16
10.3 Restricted Stock Unit Matching Grant Agreement, dated
October 7, 2002, between Alleghany Corporation and
Weston M. Hicks
(b) Reports on Form 8-K.
The Company filed a report on Form 8-K dated August 8, 2002 to report in
Item 9 that the Company's principal executive officer and principal financial
officer, respectively, had submitted to the SEC sworn statements pursuant to
Securities and Exchange Commission Order 4-460.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALLEGHANY CORPORATION
---------------------
Registrant
Date: November 12, 2002 /s/ David B. Cuming
-------------------
David B. Cuming
Senior Vice President
(and chief financial officer)
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, John J. Burns, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Alleghany
Corporation (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Registrant as of, and for, the periods presented in this
quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we
have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities,
18
particularly during the period in which this quarterly report is
being prepared;
b. evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 12, 2002
/s/ JOHN J. BURNS, JR.
-----------------------
John J. Burns, Jr.
President and chief executive officer
19
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, David B. Cuming, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Alleghany
Corporation (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Registrant as of, and for, the periods presented in this
quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we
have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
20
other employees who have a significant role in the Registrant's
internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 12, 2002
/s/ DAVID B. CUMING
---------------------
David B. Cuming
Senior Vice President and chief financial
officer
21